Zhao Naibao, Xu Bing, Maxwell Pak, and PhD student Wang Yuting from the Department of Applied Economics at our institute recently published a paper titled Household Portfolio Allocation in China from the Perspective of Expected Housing Returns in the Economic Research Journal, 1st issue, a top-tier journal in the field of economics in China, in 2023.

Unlike existing literature that either describes the characteristic fact that Chinese households "overinvest in housing and underinvest in stocks" or studies the influencing factors of limited participation in the stock market, this paper answers the following questions through theoretical modeling, structural estimation, and counterfactual analysis: Is the asset allocation of Chinese households optimal? If not, what are the possible reasons? And what impact will this have on the accumulation of household wealth?

Using data from the 2019 China Household Finance Survey and historical asset performance data, this paper is the first to discover a contradiction between the actual asset allocation level of Chinese households and the efficient asset allocation level of classical portfolio theory, and proposes that households holding incorrect expected returns on real estate income may be a major reason for this discrepancy. By incorporating this assumption into the standard mean-variance portfolio framework, this paper constructs an asset allocation structure model with subjective perceptions, empirically tests this assumption, and quantitatively studies its impact on Chinese household asset allocation. The results show that Chinese households generally overestimate the expected annualized return on real estate by an average of 2.8 percentage points. More importantly, this cognitive bias regarding the expected return on real estate differs across city tiers; households in first-tier cities underestimate the expected return, while households in non-first-tier cities overestimate it by up to 4.9 percentage points. Counterfactual analysis indicates that overestimating housing returns reduces household wealth by an average of 5.2% of annual household income nationwide, and by as much as 8.9% in non-first-tier cities. This research formalizes the widely held belief among Chinese households that “buying property is the only real investment.” It not only verifies the prevalence of such beliefs but also quantifies their negative impact on household wealth accumulation. These findings improve our understanding of Chinese household portfolio behavior and offer new insights for policies promoting rational household asset allocation.

About the Authors

Zhao Naibao holds a PhD in Economics from Texas A&M University, specializing in industrial economics, household finance, labor economics, and microeconometrics. Xu Bing holds a PhD in Economics from the University of Georgia, specializing in labor economics and household decision-making under different circumstances. Maxwell Pak holds a PhD in Economics from the University of California, Berkeley, specializing in microeconomic theory and game theory. Wang Yuting is a PhD candidate in the 2020 cohort of the "Guanghua Doctoral Innovation Project" at the RIEM, Southwestern University of Finance and Economics, specializing in household finance and applied microeconomics.